The historical evidence is worrisome, however. The IMF’s forthcoming World Economic Outlook presents evidence from 88 banking crises over the past four decades in a wide range of countries. While there is large variation across countries, the conclusion is that, on average, output does not go back to its old trend path, but remains permanently below it. The possible good news is that the trend itself appears to be unaffected: on average, crises permanently decrease the level of output, but not its growth rate. So, if past is prologue, the world economy likely will return to its past growth rate. But, especially in advanced countries, the period of above-average growth, characteristic of normal recoveries, may be short-lived or nonexistent.

What Olivier is saying is that the shocks to the level of GDP from banking crises are typically permanent. That is, in econometric terms, there is a unit root. Of course, Olivier could be wrong. But I am pretty sure that he is not guilty of "deliberate obtuseness."

By the way, the administration's midsession review, with its updated forecast, should be coming out soon. Will Team Obama continue to forecast a rebound to the previous trend path, as they did earlier in the year, or will they change their view and take to heart the kind of evidence Olivier describes above? Either way, it will be noteworthy.

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.